The ‘Risk On Trade’ For Gold Is Back

 | Mar 16, 2014 03:53PM ET

h2 Summary/h2
  • The dollar broke major support levels signaling lower prices are possible.
  • More uncertainty regarding U.S. monetary policy not supportive for the U.S. dollar.
  • The gold and silver markets are becoming the “Risk On Trade” flavor of the month once again.

The U.S. dollar Index March futures contract closed at 79.44. This is a very significant close as it broke the previous long-term support level of 79.47 made on October 21, 2013. This is not so coincidental that the gold and silver markets had their best prices in months and closed above the $1,360 resistance levels made back in October of 2013.

Gold for April delivery rose another $6.60, or 0.5%, to settle at $1,379 an ounce on the Comex division of the New York Mercantile Exchange, holding ground at the highest settlement level for a most-active contract since early September. For the week, prices gained roughly 3%.

May silver added nearly 22 cents, or 1%, to close at $21.41 an ounce, with prices based on the most-active contracts up about 2.3% from a week ago.

In a recent interview with the Equity Management Academy I asked Dr. Marc Faber the following questions, “What is your view on the US dollar and gold if interest rates begin to rise and how would this affect the world economies?”

“I think it’s quite likely that interest rates will go up, but we have to understand in what context. At the present time we have a 0 based fund rate. Now, please explain to me and your listeners what do you think are your cost of living increases annually in the US? 1% , 2% or more likely more than 5%, including insurance premiums, food, energy and healthcare. My view for most American families is the cost of living increases are between 5 and 10% per annum. We have a 0 fed fund rate, so in real terms inflation adjusted, the fed fund rate is negative in the order of 5% or more. And if they increase one day the Fed’s fund rate somewhat in the order say maybe two percent three percent that would be a huge increase already. By then already maybe the cost of living increase would be 10% or 15% So, I think that under Yellen and the other FED governors that are all dovish, basically with very few exceptions, the FED funds rate will stay negative in real terms inflation adjusted, that is positive for gold.”

Is this the end of the US dollar as the world’s reserve currency? I asked. And he said:

“Well I think that the dollar will stay as a reserve currency not because anything in particular is good about the US dollar. I have to say that the energy dependence of the US from foreign producers has been diminishing, so that is a plus. But there are so many other negatives including Obama Care, the lack of education and the dysfunctional government. But in general from a currency point of view I think the dollar should have been stronger. The problem is the other countries and the other currencies are no better. So in my view well to do people and those people that are thinking for themselves, they will overtime continue to diversify out of paper money into physical gold.”

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The real dilemma lies in the fact the world economies are now better off especially as it pertains to their debt to GDP ratios.

In a recently published article I asked Sprott’s Rick Rule the following question, “Developing countries like Zimbabwe for example have replaced the dollar with the Chinese yuan as their local currency. Is this a sign of the demise of the U.S. dollar as the world reserve currency?”

And he said:

“I don’t believe so. My Chinese clients my high net worth clients tell me that although emerging markets don’t trust the U.S. they trust each other less. The U.S currency, I mean it is ironic that four months ago we had a situation where we threatened to default on our U.S sovereign obligations and the market response was to bid up the U.S dollar, the U.S debt. That will tell you something the durability of the franchise that we are proposing to waste. I would describe the U.S. dollar in the context of being the world currency as being the prettiest mare in the slaughterhouse. The renminbi is challenged by the opacity of the Chinese economy, its challenged by the structure of an economy where 20k people attempt to rule 1.2 billion people, it’s challenged by the depth of the securities market, it’s challenged by the liquidity with which it trades on a global basis relative to the U.S dollar. In other words it is useful to talk about the Chinese currency superseding the U.S. dollar in the context of the fact that it helps sell newsletters. But that’s its sole utility. It can’t compete against the U.S. dollar in a fair fight. That isn’t to say that the Chinese economy can’t grow faster than the U.S. economy. That’s a very different discussion, but the idea that any currency on a global basis, any fiat currency on a global basis can compete with the U.S. dollar for the next 2-3 decades is a non starter.”

With conflicting opinions by some of the best financial pundits in the business, it is easy to understand why there is so much uncertainty unfolding in the currency markets and why gold and silver are starting to be the recipients of the “Risk On Trade” mentality, becoming the flavor of the month.

With the U.S. Dollar Index March futures contract closing below the Weekly Price Momentum Indicator of 79.55, it confirmed a bearish trend is in place. The close below the short term 9 day moving average of 80.39 additionally confirms a bearish trend. The 79.17 to 78.91 price range offers critical levels of support. The resistance levels begin in the 79.82 to 80.21 trading range.